Timely and corrective measures imperative for
hitting the targets of 2001

By AMANULLAH BASHARNov 13 - 19, 2000

Pakistan's total external debt outstanding on June 30, 2000
is estimated at $32.7 billion or 53.8 per cent of GDP. If other foreign exchange
liabilities such as foreign currency accounts are added, the total external
liabilities rise to $37.3 billion or 61.3 per cent GDP.

For the first time in the recent years, the annual report for
1999-2000 released by the State Bank of Pakistan (SBP) is not loaded with
gimmicks to give a rosy picture about the financial health of the country.
Instead the report has come out with a clarity of debt situation by brushing
aside all kite flying estimates as to how much exactly is Pakistan's external
debt. The credit goes to Governor Ishrat Husain of course.

Due to absence of exact figures of Pakistan's external
liabilities has evoked a great deal of speculation, conjectures and wild
guesstimates in the press and elsewhere. The conflicting numbers that have been
cited by the resulting confusion arises due to differences in coverage and the
categorization and measurement of external debt. Minor differences also arise
from the use of varying rupee conversion rates.

According to figures released by the Central Bank, debt
servicing on account of these liabilities amounted to $7.8 billion or 95.9 per
cent of the country's realized export earnings in 2000. As it was not possible
to pay this amount fully and still meet the economy's demand for imports, more
than half the contractual debt servicing had to be rescheduled (Paris Club)
restructured (Eurobonds).

Contrary to popular perception, the rescheduling agreed by
Paris Club creditors for 2000 was only $1.3 billion; relief on the larger amount
$2.6 billion was obtained outside the framework of the Paris Club.

Of the total amount falling due in financial year 2000, $3.7
billion was actually paid out of the country's foreign exchange earnings and by
drawing down liquid reserves. The amount eligible for rescheduling/ rollover in
financial 2001 is projected at $2.2 billion, which is 56.4 per cent lower than
the $3.9 billion rescheduled in 2000.

Pakistan's External Liabilities at the end of
financial 2000 (US$ million)

1.Public & publicly guaranteed
debt

27,654

A. Medium and Long term (> 1 year)

Paris Club:

12,428

Multilateral

10,767

Other Bilateral

639

Eurobonds

610

NHA Bonds

241 (provisional)

Military Debt

958 (provisional)

Commercial Loans/Credits

1,100

Others

350

B. Short term (< 1 year)

561

IDB

130

Others

431

II. Private Non-guaranteed Debt

2,842

Medium and Long term (> 1 year)

2,842

Private Loans/Credits

2,842

III. Central Bank Deposits

700

IV IMF

1,550

Total External Debt

32,746

V. Foreign Exchange Liabilities

4,558

Foreign Currency Accounts

2,349

FE-45=

1,072

FE 25 Deposits

977

Outside SBP

616

With SBP (FE 13)

361

FE 31 (incremental)

300

Special US$ Bonds

1,297

National Debt Retirement Program

156

Other Liabilities

756

Total External Liabilities (1 to V)

37,304

External Liabilities Payable in Rupee

1,720

Frozen FCAs

1,572

FEBC

109

FCBC

36

DBC

3

Pakistan's economy during financial year 2000 showed some
signs of improvement, stability, along with a modest growth rate. However a
combination of domestic and external shocks coupled with structural shifts kept
the economy under stress.

The residual vestiges of May 1998, the political uncertainty
and the change of government in October 1999, were domestic shocks to the
economy. On the external front, a breakdown in negotiations with the IMF in
May-September 1999, the spike in world oil prices, the lingering dispute with
Hubco and serious reservations in some international quarters on the emergence
of a military government, exacerbated the situation. Since October 1999 the new
government's economic agenda which is based on accountability, improved
governance, widening the tax net and closure of official avenues of hiding
wealth, created major structural shifts in the economy. Although the Pakistani
economy has been inherently resilient and weathered many shocks in the past, its
capacity to absorb domestic and external shocks along with fundamental
structural changes at the same time has been tested to the limits during
financial year 2000.

Although these structural changes may lay the foundations for
a more sustainable and equitable growth in the future, the short-term
transitional costs are significant. The withdrawal of investors who had built
their fortunes on the basis of concessions, privileges, connections, tax evasion
and loan defaults has created a vacuum for the time being. The potential
beneficiaries of the new system are yet to emerge and will take time to
establish themselves. The government could have filled in this gap but its own
public finances are structurally weak.

The combination of a slowdown in the informal economy and the
cumulative cut in productive public spending over the last few years has not
only reduced opportunities for economic expansion and employment generation but
may be able to sustain the productive use of additions to the labour force. The
only exception to this is the agriculture sector, which has resulted in a large
infusion of purchasing power in rural areas.

As a result of strong agriculture performance, the real
sector witnessed a turnaround and GDP growth rose to 4.8 per cent from 3.1 per
cent a year back. Bumper crops of cotton and wheat coupled with an increase in
the production of rice led to agricultural growth of 7.2 per cent, which
improved self sufficiency in food and the quantitative increase in exports.

The bumper cotton crop, low domestic cotton prices and
falling interest rates created very favourable conditions for the textile
sector. Value added in this sector grew by 13.0 per cent in the financial year
2000 compared to 2 per cent a year earlier. But the expansion was insufficient
to offset the large decline in the sugar sector. Therefore, large-scale
manufacturing did not show any growth this year. However, if sugar is excluded
large scale manufacturing did perform well with sectoral growth at 6.8 per cent
compared to 5.8 per cent in the preceding year.

3-pronged strategy

The Central Bank has identified adjustment in fiscal accounts
as the most obvious element of strategy. Pakistan has never been known for
austerity and fiscal prudence and the public savings rate has always been
chronically negative. However the recent attempt to capture unrecorded
commercial transactions and extend taxes to retail trade/services are steps in
the right direction. Thus future fiscal adjustment will depend to a large extent
on the success of current efforts to widen the tax base and bring in a larger
segment of potential taxpayers within the net.

Export growth is the second key element of the government's
strategy, although a concerted efforts has already been taken to keep Pakistani
exports competitive by pursuing a market based exchange rate policy, serious
efforts are needed to remove non-price impediments, improve efficiency in
production of exportable items and enhance the outward orientation of Pakistani
exporters.

The third element, which will impact Pakistan's medium term
prospects, is the speed at which new investment both foreign and domestic can be
attracted. The impending agreement with the IMF and the 3-year facility in
particular will provide some comfort to potential investors.

The central bank has however recommended that an early
settlement of the lingering dispute with Hubco will go a long way in restoring
foreign investors confidence in Pakistan. The three investment areas that appear
promising in this respect are Oil & Gas, Textile modernization and
Information Technology.

Outlook

The preliminary projections for financial year 2001 indicate
that GDP growth will be around 4.5 per cent. The impressive growth rate attained
by the agriculture sector in 2000 is unlikely to repeat itself as the base has
already risen significantly. There will be some resurgence in Large Scale
manufacturing particularly in the textile sector but its overall weight i.e.
19.1 per cent is still insufficient to have much of an impact. Inflation is
projected around 6-7 per cent, while the current account deficit is expected to
slide further to 1 per cent of GDP. Public finances are expected to improve
significantly as a result of the documentation drive and tax survey.

Consequently, tax revenues are projected to grow by 14.2 per
cent in financial year 2001 to reduce the fiscal deficit to 4.6 per cent of GDP.
The realization of these projected increases in exports and tax revenues will
determine the medium term direction of the economy.

There are many areas of serious concerns, which need to be
addressed during the current fiscal year. GDP growth may remain sluggish on the
basis of the following factors: agriculture prospects may be dampened due to
lower supply of irrigated water: The revival of sick industries has been much
slower than expected.

Credit expansion to the private sector may remain supply
constrained if the aggregate deposit base does not increase, while higher
lending rates may deter private sector borrowing: The higher inflationary
depreciation of the rupee may require an upward revision of utility prices.
These factors may reduce private consumption, which can lower aggregate demand
through the multiplier effect. There is also a resulting risk that the fiscal
deficit may not be contained within the projected level due to higher debt
servicing and the price increase of imported components of development and
recurrent expenditures. The government will have to monitor this situation and
take corrective and timely measures to mitigate the above risks, failing which,
the goals set for financial year 2001 may be difficult to achieve, the Central
Banks warned.